Howz Real Estate Doin’?

The WSJ reported that "Housing starts rose sharply in November, up 5.3% to a 2.123 million
annual rate. October and September were revised slightly higher.
Permits also showed strength in November, up 2.5% to 2.155 million."

Yet a significant part of my Bearish thesis for next year is that Real
Estate, the prime driver of the 2003-05 economy, will slow, with little
else to fill the void.

How do I reconcile the two?

Housing_starts From clients in the Real Estate industry, I have learned that Builders build — and keep building. They do not try to guess when the cycle will end.

Why not? Look at their risk versus reward: If they guess wrong and stop building too soon, they miss out on some of the boom. If they build past the cycle’s end, they may get stuck with excess inventory, forcing price cuts. But that usually means they are selling at a smaller profit; they paid much less for the land (bought years prior); it cost them relatively little to erect a house — materials plus labor.

Even in the most severe slow down, the end game is merely the cost of doing business, and hardly dents the accumulated profits of the prior 3-5 years. So rather than just guess when the music will stop, they simply keep on building — until sales slow dramatically.

Bottom line: New home starts and permit apps are not a leading indicator of the housing cycle.


let’s have a look at (my decidely biased collection) of recent Real Estate related articles; You can decide for yourself if my thesis is in any way endangered by yesterday’s data.  As always, you may click to enlarge graphics (or see Sources at bottom for originals):


Built on the boom: Realty feels a chill
"I knew it was going to have to slow down (but) I didn’t think we would have so much inventory. I’m hoping somebody will offer me a fair deal that’ll make me a little bit of money."

A wintry chill has descended on the Sacramento housing market. Sales have slowed, cancellations of new-home purchases have soared, and prices in some areas are edging downward – signaling the end of an epic housing boom that increased wealth, generated jobs and turned real estate into the healthiest sector of an otherwise sluggish economy.

In the Sacramento resale market, sales volume fell nearly 20 percent in October from a year ago, said DataQuick Information Systems. The median price of a resale home in Sacramento County fell 2 percent to $363,000 in October from $372,000 in August, according to DataQuick.

As for new homes, prices could take a hit because builders keep building. Sales of new homes in the area fell 49 percent in the September-through-November period compared with last year, according to the Building Industry Association, which tracks 55 percent of the market.


New-home sales spring a leak
New-home sales are falling in the Chicago area, signaling an abrupt end
to an unprecedented growth streak. Amid rising interest rates, weakened
consumer sentiment and talk of a housing bubble, sales of new homes
slipped this fall, a trend expected to accelerate next year.

"We’re starting to see some erosion in the market," says Mr. Cross,
president of Tracy Cross & Associates Inc. in Schaumburg. The
economy and job growth are "not going to be strong enough to offset the
impact of (mortgage) rate increases."

Inventories of unsold homes are rising, prices are falling, and
builders are rolling out incentives to stoke demand. In a recent
Chicago Tribune ad, Dallas-based builder Centex Corp. touted price cuts
at 15 homes in the far west suburbs.

Rising interest rates have crimped demand, as well. Thirty-year
fixed-rate mortgages last week averaged 6.30% nationwide, up from 5.68%
a year ago, according to the Federal Home Loan Mortgage Corp.


Property taxes still on rise in Mass

The median property tax bill for single-family homes in most of Massachusetts will be $3,262 in 2006, 6.4 percent more than last year and up 42 percent from the 2000 tax bills, according to a Globe examination of 239 of the state’s 351 cities and towns. Most of the new tax rates will go into effect in bills that go out Dec. 31. Bostonians who own single-family homes will see an increase of 9.2
percent in 2006, down from an 11.7 percent jump between 2004 and 2005.

Of the 239 cities and towns examined for this article, the Globe found that 230 of them are increasing their average tax bills in 2006. The analysis also found that property home values are still increasing, though at a much slower rate than last year.


Boom likely over in housing market
"One warning sign for the housing market is that more and more owners are putting property on the market, and real estate is taking longer to sell. "The risk is that if sales slow, there will be too much supply, creating price risk," Rosen said. Meanwhile, there are few reports of multiple bidders seeking a given home.


Wealthy Families See Home Values Climbing Further 
Even amid signs of a housing-market slowdown, most wealthy people expect the value of their primary homes to continue rising over the next five years, according to a survey sponsored by PNC Financial Services Group Inc.

The Pittsburgh banking company said 65% of those surveyed expect the value of their homes to rise by at least 10% over the next five years, and 31% expect an increase of more than 20% during the same period. Only 7% expected a decline.

Over the past five years, the average U.S. home price has increased by more than 50%, and prices have more than doubled in many cities. In recent months, the housing market has shown signs of slowing as inventories of unsold homes pile up.


Built on the boom: Realty feels a chill
By Andrew LePage and Dale Kasler
The Sacramento Bee, Sunday, December 18, 2005, Page A1
Bye-bye Boom Graphic

New-home sales spring a leak
By Alby Gallun
Crain’s Chicago Business, December 19, 2005

Property taxes still on rise in Mass.
State’s median bill will top $3,000
Matt Viser
Boston Globe, December 18, 2005
Mass Property Tax Changes

Boom likely over in housing market
By William Sluis
Knight Ridder Newspapers

Wealthy Families See Home Values Climbing Further
THE WALL STREET JOURNAL, December 20, 2005; Page D2

The Housing Bubble

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What's been said:

Discussions found on the web:
  1. Larry Nusbaum, Scottsdale commented on Dec 21

    Howz Real Estate Doin’?
    For Arizona, go to ASU’s site and look for the Real Estate page.

  2. Barry Ritholtz commented on Dec 21

    Media predicting Real Estate doom & gloom for 5 years ?

    where on earth did you get that ?

    they’ve been the great enablers of the bull run !

  3. B commented on Dec 21

    No doubt a slowdown or drop on the coasts. But, will it be a repeat of 1990ish, which is a totally acceptable equities/economic slowdown or will it be a deflationary nightmare and a cause for asset backed security problems?

    To me that is the worrisome and primary question. Too many bears believe this to be the outcome without question. To the contrary, this has happened time and again but the worst case scenario hasn’t applied in modern times.

  4. D. commented on Dec 21

    Just Google Real estate bubble. There’s not much negative out there yet! Ironically, I found Barry’s blog by Googling just that and he was in the top 5!!!

    Anyway, we might see the word bubble a lot but not many believe there is one in real estate. For the last year, I’ve been making it a point to talk about it at dinners and rarely have I found someone who thinks prices can come down.

    It’s like the tech bubble. I still remember someone close telling me you could not lose money on Microsoft.

    I don’t care if the letters are in bold, italic or caps, I’m holding on to my view that many will get burned. Many greedy souls lack a self-preservation gene.

  5. erikpupo commented on Dec 21

    Look at the NAR stats. They have a vested interest in making things look as good as possible. Thats like looking at the Enron prospectus to invest in Enron in 2001.

  6. Anonymous commented on Dec 21

    Barry, let me just say that your insight and analysis continues to amaze me. I’ve been reading your blog for awhile, and I consider your ideas so far above and beyond the junk the popular media blurts out, even economics-related publications. Your blog is the first item on my Bloglines list, followed by’s blog (and I prefer yours to theirs!). Keep up the good work!

    BR: Thanks for the kind words!

  7. Jack K. Miller commented on Dec 21


    It is difficult to expect a housing collapse with 78 million Americans between the ages of 48 and 60. I have forgotten the cohort numbers for the boomers children but, there are millions at prime buying age. The young folks are at prime age to buy a first home and the boomers are the prime age to move-up or to buy a second home.

    Certainly the blip up in interest rates has slowed the housing market down from a blistering pace. However, England slowed a year ago but now seems ready to lower rates. The FOMC seems ready to stop raising rates. The London market may gain momentum again as soon as rates come off and the US market will likely follow. Again, not at the prior blistering pace as mortgage rates are not likely to see last year’s lows, but at a steady pace.

  8. Barry Ritholtz commented on Dec 21

    I may sleep with Anna Kournikova next year . . .

    What else may happen next year — as in, is theoretically possible (but probably unlikely) ?

  9. JWC commented on Dec 21

    Barry, as someone who hopes to move to a ranch type villa (getting older you know) in the next year or so I have been carefully following real estate news. I believe that there is a bubble which is worse in certain parts of the country. I live in the Midwest and the news here is that we are not in a bubble situation. But still the regional papers is reporting some slow down in real estate. In talking to a realitor who evaulated our current home for its resale potential, he said that he had seen the inventories of resales up and a lot price reductions recently. Looking at the Real Estate section of the paper the other day, I noticed some of the builders who had the villas for sale were offering “price incentives” to buyers, something I had not seen before.

    I trust you and your evalualtions more than the hype I see on television and even read some places. We are taking a wait and see approach and saving money so that we will have as much cash as possible when we get ready to make the move. Budgeting for higher interest on what small loan we will need, and also “planning” that we might have to take a hit on our current home. If the math doesn’t work out with those assumptions, we will stay where we are until it does.

    Your blog is wonderful!

  10. apav commented on Dec 21

    There is the “muddle through” possibility, where the Fed adjusts the interest rate just right. However real estate has a big momemtum factor. It’s non-linear, with nasty feedback. Same with stock prices, consumer confidence, and foriegn exchange rates. Given that consumer debt burden limits how much more the consumer can borrow (at some point), I’d say the odds are miniscule that the Fed gets it right by itself. The only real arguement for “muddle through” is that China and Japan, in their own self interest, may continue to support the dollar and a China slowdown will add deflationary pressure.

    Barry, you make gutsy midrange macro calls and I like that you are always looking to see why you might be wrong.

    I’ve learned that my bearishness is usually wrong and to bet with the bulls. But I’m willing to underperform a tad so that I can sleep at night – insurance isn’t free but comfort is worth something. In this case, both stoploss and putting a significant percentage into gold (shudder). Too much money floating around – though I don’t understand what happens to it if the liquidity gets cut by China, Japan, Europe and the US as appears to be happening. But one of them is sure to reverse that when things slow and may have to resort to “helicopter” strategies, so I come back to gold.

  11. kdawg commented on Dec 21

    Even if we look at the NAR affordibility index it would show the huge desrepancy in wages vs. median house prices in the Western region.

    The index is at 79.7 which says that the median home buyer in the West only qualifies for that percentage of a traditional 30-year fixed. But if you live in a major metropolitan city like San Fran or L.A. then the numbers go up appreciably.

    The index says $322,000 for a median house which would, of course, double in an area like L.A. That would make the median income for the index go to $146k for a 30-year fixed. Since the avg. income for a single worker in the U.S. is around $43k, you could say that the 2 income family is coming up a little short. The $146k might be on the high side but still even if we look at the CAR index (California Assocation of Realtors) the qualifying income for a 30 year fixed is around $128k. Still not good enough.

    You want froth, go take a look at the local community colleges and see how many people are jamming into Principle of Real Estate classes in Calif.

  12. Larry Nusbaum, Scottsdale commented on Dec 21

    Media predicting Real Estate doom & gloom for 5 years ? where on earth did you get that ?
    they’ve been the great enablers of the bull run !
    Posted by: Barry Ritholtz | Dec 21, 2005 8:15:31 AM

    WRONG, WRONG, WRONG. Magazine cover story afte another. WALL ST Journnal articles for 5 years. CNBC talking about the hosuing bubble for over 2 years. WHERE? IN EVERY FACET OF MY LIFE I SEE, READ AND HEAR IT. In fact, in March of 2000, I found a quote from the WS Journal talking about how Economists were worried about the sharp rise in housing prices and that the bubble may soon pop. Shall I find it again or will you take my word for it?

  13. Larry Nusbaum, Scottsdale commented on Dec 21

    The index is at 79.7 which says that the median home buyer in the West only qualifies for that percentage of a traditional 30-year fixed. But if you live in a major metropolitan city like San Fran or L.A. then the numbers go up appreciably.


  14. Larry Nusbaum, Scottsdale commented on Dec 21

    The Wall Street Journal, March 6, 2000:

    “…for now, the frothy buying conditions in some of the nation’s biggest housing markets, especially for high-end-homes, worry economists, who remember how the housing market crashed in the late 1980s after some markets overheated.”

  15. jm commented on Dec 21

    Jack K. Miller:

    Your statement that, “It is difficult to expect a housing collapse with 78 million Americans between the ages of 48 and 60. … there are millions at … at prime age to buy a first home …”

    I think you should more closely peruse the actual stats at the Census Bureau site.
    Some good places to start:

    At the first you will find the stats copied below for the percentages of householders in each age cohort “owning” the home in which they live. If you look back over the data for earlier years, you will see ownership in all age ranges at or near record highs, and especially so for the under-29s. If you rummage around through the wealth of data on the site, you’ll also see that:
    – even the 1.1-1.2 million unit per year construction rates of the ’90s were sufficient to increase the overall ownership rate about 0.5 percentage points every year (they’re now building at a rate above 2 million),
    – from Q3 ’04 to Q3 ’05 there was a marked slowdown in the rate of rise of the absolute number householders owning their abodes, and simultaneously a marked reversal in the previously steady decline in the number of those renting,
    – the above happened despite an increase of about 1.5 million in the number of homes (fully consistent with the reports of so many new homes being bought by “investors” who then rent them out).

    Overall, what the stats show is that there is less “pent-up demand” than at any time in decades, no shortage at all of housing to rent or buy, and much less potential demand from the under-29 set than in the ’90s (when their home ownership rates were only a little more than half what it is today). Just about everyone who can even remotely afford to own a home already has one, and it’s clear from the stats that a lot of people already own two or more.

    Since very few people can afford to buy a new home unless they can sell their old one (and at a profit), the small amount of remaining potential demand from the younger cohorts bodes ill for the market’s future.

    Age Cohort Ownership
    United States………68.8%
    Under 25 years……27.0%
    25 to 29 years……..40.7%
    30 to 34 years……..56.1%
    35 to 39 years……..65.8%
    40 to 44 years……..71.1%
    45 to 49 years……..74.7%
    50 to 54 years……..78.9%
    55 to 59 years……..80.4%
    60 to 64 years……..81.6%
    65 to 69 years……..83.4%
    70 to 74 years……..82.5%
    75 years and over….78.4%
    Under 35 years……43.0%
    35 to 44 years……..68.6%
    45 to 54 years……..76.7%
    55 to 64 years……..80.9%
    65 years and over…80.6%

  16. Barry Ritholtz commented on Dec 22


    Good find — but I suspect that was more reflective of the tech/telecom bubble dot com money sloshing around in 1999/2000 than it had to do with a Real Estate bubble in March of 2000.

    While that was very much a tech bubble phenomena, most of the media had bought into the new paradigm nonsense and were busy counting “eyeballs” and clicks.

    The certainly weren’t warning people of he impending crash, and anyone who did was immediately labelled a perma bear or a pariah.

  17. John commented on Dec 22

    So who among us is planning to sell in anticipation of a drop? I am strongly considering it in the early spring. I am reasonably young (33) and do not have a family so it is easier for me than many, to be sure. I have owned in the Bay Area since ’98, and it is mighty tempting to cash in and rent for a while. I think it would be interesting to hear what people are planning to do and what they would do if they had no family constraints, etc.. If you would like to sell but can’t, are you hedging in other ways?

  18. jm commented on Dec 22

    A correction:

    I erred above in writing “…from the under-29 set than in the ’90s (when their home ownership rates were only a little more than half what it is today).” That applies only for the under-25 set (for which the factor is about 1.7). For the 25-29 age cohort, the factor is about 1.2

    But that has no effect on the overall argument, which was not based on the exact factors. Indeed, after rechecking the spreadsheet and crunching the numbers a little more, I can estimate that at the home ownership rates and household counts in the Census Bureau’s 2004 stats, householders in the under-50 set owned 3 million more homes than they would have at the home ownership rates prevailing in 1993.

    I’ll note again that as home ownership rates rose to their present highs the rate of new construction was only about 1.1 to 1.2 million in most years, but is now above 2 million.

    There’s no shortage of homes, and no huge pentup demand.

  19. Matrix commented on Dec 22

    Builders Build: New Home Sales Are Not A Leading Indicator, Got It?

    The stats for new home construction showed more brisk activity than was expected [WSJ].

    According to the Commerce Department:

    Housing starts increased 5.3% to a seasonally adjusted annual rate of 2.123 million units.
    Permits for future building …

  20. The Big Picture commented on Dec 23

    New Home Sales versus Housing Starts and Permits

    Today, we will get the first New Home Sales (at 10:00am) after the stupendous plus 13% number last month. Recall our analysis of that back on November 30 found two interesting wrinkles: • a plus 13% is meaningless when the margin of error is 17%;• Hist…

  21. Dru Nelson commented on Dec 30


    the fed created the demand (indirectly) by making more buyers. They can do that again, maybe (see below). The nice side effect was that the rising tide created the home equity loan boom. The other side effect was commodity inflation as real dollar value went down.

    Anyways, lots of good comments here. I’ve been waiting for this bubble to burst for a while. I’ve watched prices go up and up and loans get more and more ‘stupid’. To those people who played this, good for them.

    The keys to this whole bubble are global politics, the dollar, and the buyer pool. The bears have been keen on thinking the world would call BS to any of our financial antics. This has not happened. As stated above, treasuries keep get bought by Japan, China, and the Carribean banks.

    I’m thinking that a recession or slowdown might finally test this bubble. If the buyer pool shrank up, maybe something will happen.

    The federal govt. has been very good at doing little things here and there to pump where necessary. (For example, false CPI and inflation numbers, repatriating dollars as a one time event)

    I think Barry’s analysis is sound, but I, like Barry, wish there was more real-world data. As salaries have not accelarated for the middle class, I wonder how they are affording $700k houses in the major metro areas AND paying all those taxes.

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